When To Enroll in Medicare Part D

This post has been cited in the Money Hacks Carnival #76, hosted by Moolanomy.

It isn’t so easy to figure out the right time enroll in a prescription drug plan under Medicare. If you’re healthy you may not need drug coverage. But if you delay you will incur late enrollment fees. What’s the optimum time?

First, some background. Medicare Part D is the component of the program through which Medicare beneficiaries purchase prescription drug coverage. Most beneficiaries who obtain drug coverage through Part D do so by enrolling in a stand-alone prescription drug plan (PDP). Many beneficiaries who do not enroll in Part D have creditable coverage from other sources (a former employer, the VA, etc.).

When the legislation authorizing Part D was under consideration some thought that only beneficiaries who expected to have high drug costs would enroll. That is, it was thought that PDPs would experience high adverse selection, that they would be like “providing insurance for haircuts.” Adverse selection severe enough can cause an insurance plan to die by requiring it to charge higher and higher premiums as relatively lower risk individuals drop out (the so-called “death spiral“).

To reduce adverse selection beneficiaries are encouraged to enroll in a Part D plan while they are young and relatively healthy. The chief mechanism that encourages early enrollment is a financial penalty in the amount of 1% of premium per month that enrollment is later than one’s initial eligibility (penalty waived in the case of creditable coverage).

This presents an optimization problem. Clearly if you buy drug coverage when you’re healthy and use few drugs you spend a lot on premiums for little benefit. On the other hand, the longer you wait the enrollment penalty grows.

A recent paper by Atherly and Dowd in Health Economics (Should Healthy Medicare Beneficiaries Postpone Enrollment in Medicare Part D? 18(8), 2009) concludes that purchasing Part D drug benefits when first eligible to do so is optimal, on average. Beneficiaries should not wait, even if they’re healthy and don’t use drugs. (This does not apply to individuals with creditable coverage for drugs outside of Part D.)

Because the Part D program is only a few years old and beneficiary-level data pertaining to it is not yet available to researchers, Atherly and Dowd took a simulation approach. Using Medicare Current Beneficiary Survey (MCBS) data they estimated by age and gender the probability that a healthy beneficiary will contract a health condition requiring drugs and the probability that individual will die. They then used Monte Carlo simulations to estimate expected lifetime drug spending with and without Part D coverage. Postponing Part D enrollment until one contracts a drug-intensive illness results in lifetime expenditures that are 10% higher for women and 6.5% higher for men, on average.

Thus, on average it is better to purchase Part D coverage as early as possible, though not that much better. If you think you’re likely to be healthier than the average beneficiary you might just beat that 10% (for women) or 6.5% (for men) spread. Is it worth the risk? Likely not. I would perfer the peace of mind of the coverage and use my mental energy to enjoy my retirement.

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